OPINION
I. INTRODUCTION
Before the Court are cross-appeals from the Bankruptcy Court’s September 8, 1997, and October 7,1997 Opinions in these consolidated adversary proceedings. The Chapter 7 debtors in these bankruptcy cases, and defendants in these adversary proceedings, Eric J. Blatstein (“Blatstein”) and Main, Inc. (“Main”), a corporation controlled by Blat-stein, have appealed the Bankruptcy Court’s holding that Blatstein and his long-time accountant, Morris Lift (“Lift”) orchestrated a series of “sham” transactions designed to strip Main of its only asset — the Philly Rock Bar and Restaurant (“Philly Rock”) — to prevent the plaintiff in these adversary proceedings, 718 Arch Street Associates (“Arch”), from collecting a $2.7 million default judgment that it obtained against Main in November, 1993. 1 Blatstein also appeals the Bankruptcy Court’s holding that, as a consequence of his alleged efforts to thwart Arch’s collection of its judgment, he should be denied his personal bankruptcy discharge pursuant to 11 U.S.C. § 727(a)(2)(A).
Lift, also a defendant in the adversary proceedings, appeals the Bankruptcy Court’s holding that his July 25, 1996 public foreclosure on Main’s assets and subsequent transfer of those assets to Columbusco, Inc. (“Co-lumbusco”) must be set aside pursuant to Pennsylvania’s Uniform Fraudulent Transfer Act. Lift also appeals the Bankruptcy Court’s rejection of the $492,415.41 Proof of Claim that he filed in connection with the Main bankruptcy case.
The Bankruptcy Court found in Blatstein’s favor on two issues. Chief Judge Scholl held that: (1) Blatstein’s alleged transfer of in excess of $1 million to accounts maintained in the name of his wife, Lori Blatstein, was not fraudulent; 2 and (2) Arch had failed to carry its burden in its claim for alter-ego liability on the non-debtor corporate defendants. 3 Arch appeals both of these rulings. 4
II. FACTUAL BACKGROUND
Blatstein has owned and operated nightclubs and restaurants in Philadelphia for decades. Presently, his establishments in Philadelphia include Philly Rock, the Engine 46 Steakhouse, and the Maui nightclub. He owns and operates each of these establishments as a separate corporation.
5
As a result of tax liens and other credit problems, Blatstein has had difficulty obtaining financing for his new restaurants from commercial lenders.
See In re Main, Inc.,
In 1987, Blatstein opened the Phoenix nightclub at 718 Arch Street in Philadelphia.
In re Main, Inc.,
In 1989, Archco filed a Chapter 11 bankruptcy proceeding in which it elected to assume the lease with Arch.
On November 12, 1992, Arch entered a confessed judgment against Archco and Blatstein for $2,774,803, representing past due rent and future accelerated rent from the date of the breach in April, 1992 through the expiration of the lease term in 2003.
In September, 1989, more than three years before Arch obtained its confessed judgment against Archo, Blatstein had formed Main to operate a new restaurant, which eventually opened in 1991 as Philly Rock.
The Bankruptcy Court found that Blastein executed the January 31,1989 judgment note for the “old loans of the failed businesses and allegedly told Lift at that time that he and Main would pay off the debts of the old corporations to him as a condition of his
On May 28,1992, following alleged defaults on the notes, Lift entered confessed judgments against Main for $43,229.50, based on the October, 1991 note, and for $174,443.40, based on the February, 1992 note.
Shortly after Arch obtained its $2.7 million confessed judgment against Archco, it began serving interrogatories in aid of execution on corporations then owned by Blatstein, including Main.
In February, 1996, on the basis of its default judgment, Arch garnished $56,228.51 from Main’s account at Jefferson Bank.
Within days of Arch’s garnishment, Blat-stein instructed his controller, Kenneth Shoop, to deposit Main’s receivables into an account maintained at Jefferson Bank in the name of Reedco, Inc. (“Reedco”), a corporation that Blatstein had formed in December, 1995, but which was not yet operating.
On April 16, 1996, Arch caused the Philadelphia Sheriffs Department to levy on Main’s furniture, equipment, liquor license, and the entire contents of Philly Rock.
On July 25, 1996, Lift purchased Main’s assets at a public foreclosure sale conducted by auctioneer Barry S. Slosberg, Inc. (“Slos-berg”) and advertised in the
Philadelphia
Inquirer,
9
Following the foreclosure, Lift transferred Philly Rock’s furniture, equipment and inventory, which he valued at $35,000, and its liquor license, which he valued at $23,000, to Columbuseo.
III. THE PROCEEDINGS BELOW
On September 20,1996, Main filed a voluntary Chapter 11 bankruptcy which, in December, 1996, was converted to a Chapter 7. Mitchell W. Miller, Esquire was appointed Main’s interim trustee. On December 19, 1996, Blatstein filed a voluntary individual Chapter 7 bankruptcy in which Michael H. Kaliner, Esquire, was appointed as interim trustee. Both Miller and Kaliner were permitted to intervene as plaintiffs in these proceedings.
In early January, 1997, Arch filed identical adversary proceedings in both the Main and Blatstein bankruptcies. Arch named as defendants in both proceedings Blatstein, Main, Lori Blatstein, Lift, and the non-debtor corporate defendants, including Delawareeo, Inc., incorporated on March 9, 1992 (owns and operates the Maui nightclub); Engine 46 Steak House, Inc., incorporated on March 16, 1995 (operates a family restaurant); Reedco, Inc. (“Reedco”), incorporated on December 18, 1995 (owns the Margarita Café); Waterfront Management Corporation, incorporated on January 10, 1996, to serve as a management company for all of Blatstein’s businesses; Columbuseo, incorporated on May 2, 1996 which, effective July 1, 1996, assumed operation of Philly Rock; Airbev, Inc., incorporated on November 6,1995 (operates three bars and a Philly Rock at Philadelphia International Airport); and Pier 53 North, Inc., incorporated on November 22, 1993 (owns the real property on which the Maui nightclub is located).
In these proceedings, Arch argued that: (1) Blatstein and Main fraudulently transferred to Columbuseo Main’s only asset— Philly Rock — in violation of the Pennsylvania Fraudulent Transfer Act, 12 Pa. Cons.Stat. §§ 5101 et seq.; (2) Blatstein should be denied his bankruptcy discharge under 11 U.S.C. § 727(a)(2) & (a)(7) as a result of his efforts to hinder and delay Arch’s collection of its judgment against Main; (3) Blatstein’s transfer of in excess of $1 million to his wife Lori should be set aside; and (4) under a corporate alter-ego theory, the non-debtor corporations should be held liable for Arch’s judgment against Main and Blatstein.
On February 2, 1997, Arch filed a Proof of Claim against Blatstein totaling $3,398,-408.30, which included the $2,774,803.09 confessed judgment plus $623,605.29 in post-judgment interest, and a Proof of Claim against Main totaling $3,190,298.10, which included the $2,774,803.09 default judgment plus $415,495.09 in post-judgment interest. Both Blatstein and Main filed objections to Arch’s Proofs of Claim, arguing that Arch’s claim should be reduced pursuant to 11 U.S.C. § 502(b)(6), which limits a lessor’s claim in bankruptcy for future (or “reserved”) rent.
On April 15, 1997, the Bankruptcy Court held a hearing on Debtor’s Objections to Arch’s Proof of Claim, and shortly thereafter
Shortly before trial of the adversary proceedings, the Bankruptcy Court permitted Arch to Amend its Complaint to add a fraudulent transfer claim under 11 U.S.C. § 548(a), 10 and to challenge Blatstein’s bankruptcy discharge under § 727(a)(3). Trial began on May 1, 1997 and concluded on May 30, 1997. On September 8, 1997, following extensive post-trial briefings, Chief Judge Scholl issued an eighty-nine page opinion concluding that:
0) Main’s July 1,1996 conveyance of Philly Rock’s assets to Columbusco, and Lift’s subsequent foreclosure on those assets and retransfer to Columbusco, constituted fraudulent transfers under Pennsylvania law;
1) Because of Blatstein’s efforts to prevent Arch’s execution on Main’s assets, including the transfer of the Philly Rock assets and his directions to deposit Main’s receivables into bank accounts of corporate affiliates, his bankruptcy discharge would be denied under 11 U.S.C. § 727(a)(2)(A) & (a)(7);
2) Arch failed to meet its burden of proof under a corporate alter-ego theory that the non-debtor corporate defendants should be liable for Arch’s judgments against Blatstein and Main;
3) Arch failed to establish that Blatstein’s transfers of income and other funds to accounts maintained in the name of his wife Lori should be set aside as fraudulent transfers; and
4) Lift’s entire proof of claim, in the amount $492,415.41, would be denied because his security interests and judicial liens in Main’s assets were either invalid, obtained by collusion with Blat-stein, or had been paid in full.
Defendants have appealed holdings (1), (2), and (5) of the Bankruptcy Court’s September 8, 1997 Opinion and Order, while Arch has appealed holdings (3) and (4). Both Arch and Main have appealed the Bankruptcy Court’s October 7, 1997 recalculation of the cap on Arch’s future rent claim. For the following reasons, the September 8, 1996 decision of the Bankruptcy Court will be affirmed in part, reversed in part, and remanded for further proceedings consistent with this Opinion. The Bankruptcy Court’s October 7, 1997 decision will be affirmed in its entirety.
IV. DISCUSSION
The Standard of Review
“[I]n bankruptcy cases, the district court sits as an appellate court.”
In re Cohn,
On an appeal the district court or bankruptcy appellate panel may affirm, modify, or reverse a bankruptcy judge’s judgment, order, or decree or remand with instructions for further proceedings. Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses.
Fed.Bankr.R.Civ.P. 8013.
“[T]he district court ... is not authorized to engage in independent fact finding [and]
[T]he clearly erroneous standard is fairly stringent: ‘It is the responsibility of an appellate court to accept the ultimate factual determination of the fact-finder unless that determination is either completely devoid of minimum evidentiary support displaying some hue of credibility or bears no rational relationship to the supportive evi-dentiary data.’
Fellheimer, Eichen & Braverman, P.C. v. Charter Techs., Inc.,
In contrast to questions of fact governed by the clearly erroneous standard, a
de novo
standard of review applies to questions of law, which requires this Court to reach its own legal conclusions “without deferential regard to those made by the bankruptcy court.”
Fleet Consumer Discount Co. v. Graves (In re Graves),
A. The Bankruptcy Court Erred In Its Analysis Of The July, 1996 Foreclosure And Of The Objection To Lift’s Proof Of Claim.
The Bankruptcy Court held that Lift’s foreclosure on Main’s assets and his subsequent transfer of those assets to Columbusco for less than adequate consideration constituted a “sham” transaction intended to prevent Arch from executing on its default judgment against Main. Based on that conclusion, the Bankruptcy Court declared Lift’s foreclosure sale “collusive” and ordered the transfer of the Philly Rock assets set aside under Pennsylvania’s Uniform Fraudulent Transfer Act (“UFTA” or the “Act”), 12 Pa. Cons.Stat. § 5101 et seq. 11 Under UFTA a transfer may be deemed fraudulent as to creditors where it is made “with actual intent to hinder, delay or defraud any creditor of the debtor.” 12 Pa. Cons.Stat. § 5104(a) (West Supp.1997).
The Bankruptcy Court further concluded that Blatstein’s July 1, 1996 transfer of Main’s assets to Columbusco, as well as the transfer of Main’s receivables to Reedco and CFI, constituted fraudulent conveyances intended to thwart Arch’s collection efforts.
The Bankruptcy Court also sustained Plaintiffs’ objection to Lift’s Proof of Claim, noting that the debts supporting Lift’s claim resulted from loans made to entities other than Main.
The Bankruptcy Court supported these holdings with circumstantial evidence of Blat-stein's intent to hinder and delay Arch, including evidence that: (1) Lift paid only $1.00 for Main's assets; (2) prior to July, 1996, Lift had never attempted to foreclose on Main's assets; (3) Main attempted to thwart Arch's collection efforts, while it made no effort to prevent Lift's foreclosure; (4) Lift entered a confessed judgment against Main on November 12, 1992, the same day on which Arch entered its confessed judgment against Archco; and (5) Lift was an "insider" of Main.
1) The Bankruptcy Court Erred By Failing To Recognize That A Corporation May Grant A Valid Security Interest In Its Own Assets To Secure The Pre-Existing Debts Of A Corporate Affiliate.
At the outset of its discussion, the Bankruptcy Court properly recognized that its "assessment of the status of Lift" was central to its proper analysis of the fraudulent conveyance issue.
Although the Bankruptcy Court recognized the importance of ascertaining Lift's status as a potential secured creditor of Main, its ensuing discussion largely sidestepped the issue, instead focusing on Blatstein's own explanation of Main's transfers and the circumstances surrounding Lift's foreclosure, including the purportedly inadequate consideration and Lift's status as an "insider" of Main. When the Bankruptcy Court did address the status and computation of Lift's liens, see
The Bankruptcy Code and the TJni-form Commercial Code distinguish three varieties of liens: judicial liens, security interests, and statutory liens. Under § 9-301 of the Uniform Commercial Code, a "lien creditor has priority over a secured creditor only if the lien attaches before the security interest is perfected." Trinity Holdings, Inc. v. The Firestone Bank, Civ. A. No. 92-203,
In light of these principles, Lift apparently obtained perfected security interests in Main’s assets by the filing of U.C.C. financing statements in May and November of 1992. Although Arch obtained its default judgment against Main in November, 1993, it apparently did not become a lien creditor of Main until its garnishment action in February, 1996. See 13 Pa. Cons.Stat. § 9301(c) (“[A] ‘lien creditor’ means a creditor who has acquired a lien on the property involved by attachment, levy or the like.”). Until that date, Arch, relative to Lift’s potentially perfected security interest, stood in the shoes of an unsecured creditor. After that date, Arch was a lien creditor, but inferior in priority to any prior perfected security interests. Accordingly, Lift’s perfected security interests in Main’s assets should, if valid, have priority over Arch’s lien obtained following its default judgment against Main.
The question remains whether Lift’s secured interests are valid. Filing perfects those security interests which are attached. See 13 Pa. Cons.Stat. § 9302(a) (“A security interest is perfected when it has attached [and when filing has taken place].”). The security interest itself must be enforceable against the debtor before perfection against third parties may take place. Under § 9203 of Pennsylvania’s Commercial Code, a security interest attaches when: (1) the collateral is in the possession of the secured party pursuant to agreement, or the debtor has signed a security agreement which contains a description of the collateral; (2) value has been given; and (3) the debtor has rights in the collateral. 13 Pa. Cons.Stat. § 9203(a).
On February 26, 1997, Lift filed a secured proof of claim in the Main bankruptcy case for $492,415.41. At the hearing on his proof of claim, Lift presented documentary evidence reflecting that Main owed him: (1) $261,000 on the loans to Blatstein’s old corporations; (2) $62,000 towards the Beratans’ purchase of the loan from Marian; (3) $10,-000 that the Beratans loaned to Main in August 1996; (4) $100,000 that he loaned to Reedco on Main’s behalf in 1996; and (5) $43,000 which was taken from his certificates of deposit by Marian when Main defaulted on the old loans. These amounts total $476,000 which, as the Bankruptcy Court noted, fairly approximated Lift’s original $492,415 proof of claim. 13
Although the Bankruptcy Court did not find that any of these debts was invalid or insufficiently supported by the evidence, it did conclude that the obligations identified by Lift were not those of Main but of other Blatstein corporations, in particular Archo, Boulevardco, Inc., and Walnut Federal, Inc.:
[I]n a letter from Marian sent to Lift regarding the redemption of the certificates of deposit, the bank officer stated that the monies therefrom were applied to the indebtedness of Archco, Boulevardco, and the Blatsteins individually, not to Main. Moreover, in a July 20, 1993, Assignment of Promissory Notes, Mortgage, Surety, Agreements, Security Agreements and Other Collateral executed between Marian and the Blatsteins, it was specifically stated that the Marian loans assigned to the Beratans in the amount of $391,-162.67 pertained to funds borrowed by Boulevardco, Archco, and the Blatsteins on behalf of Walnut. Nowhere in any of the documents evidencing these loans is Main mentioned. Moreover, we believe that the monies loaned by Marian were for the benefit of the now-defunct old corporations, not for Main’s benefit as Lift testified. Therefore, we will not obligate Main’s bankruptcy estate to reimburse Lift on those loans.
Thus, while correctly focusing on the validity of Lift’s security interests, the Bank
Judge Van Antwerpen’s opinion in
Adelvision, L.P. v. Groff,
Following GPC’s default in the early 1990’s, Hamilton accepted the offer of a thud party, David Cook, to purchase the loan for $1.5 million, which was approximately half the outstanding balance. Id. In consideration for Cook’s purchase of the Hamilton loan, and expecting that Cook would permit him to continue to operate GPC, Groff granted Cook a security interest in the Adelvision partnership interests securing the entire loan balance. Id.
In 1992 Adelvision was sold to a third party and Groff received $794,382 in cash for his partnership interests. Id. at 801. The IRS asserted a number of tax liens against the proceeds which, with a single exception, were filed after Cook received his security interest in the Adelvision interests. Id. With respect to the junior tax liens, the IRS argued that Cook had not “given value” under § 9203 — and thus his security interest never attached — because: (1) Cook incurred no detriment when he purchased the Hamilton loan; and (2) the Adelvision limited partnership interests received no benefit from Cook’s purchase of the loan. Id. at 805-06.
In rejecting the IRS’ argument, the district court began with the U.C.C.’s definition of “value.” Id.-at 804. A person gives “value” for a security interest if he acquires the right:
(1) in return for a binding commitment to extend credit or for the extension of immediately available credit whether or not drawn upon and whether or not a chargeback is provided for in the event of difficulties in collection;
(2) as security for or in total or partial satisfaction of a preexisting claim;
(3) by accepting delivery pursuant to a preexisting contract for purchase; or
(4) generally, in return for any consideration sufficient to support a simple contract.
13 Pa. Cons.Stat. § 1201.
Focusing on (4) above, the
Adelvision
court noted that under Pennsylvania law, “ ‘[v]ahd consideration confers a benefit upon the promisor
or
causes a detriment to the promisee and must be an act, forbearance or return promise bargained for and given in
Such benefit and detriment, however, are only loosely defined. Detriment to the promisee is sufficient in the legal sense if at the request of the promisor and upon the strength of that promise, the promisee performs any act which causes the promis-ee the slightest trouble or inconvenience, and which the promisee is not otherwise obliged to perform. Moreover, the Pennsylvania courts have long held that the adequacy of consideration is not a factor to be considered in determining the validity and enforceability of a contract. Washowich v. McKeesport Municipal Water Authority, 94 Pa. Cmwlth. 509, 515,503 A.2d 1084 , 1087 (1986); Kelly by Kelly v. Ickes,427 Pa.Super. 542 ,629 A.2d 1002 (1993); Dakar v. Grzandziel,410 Pa.Super. 85 ,599 A.2d 217 (1991).
Id. at 804-05 (internal citation omitted).
The
Adelvision
court concluded that Cook’s purchase of the Hamilton loan constituted a sufficient legal detriment to support consideration under Pennsylvania law.
14
Id.
at 806. In rejecting the IRS’s argument that the partnership interests received no benefit from Cook’s purchase of the Hamilton loan, the district court found that it “need not inquire as to the benefit received by the promisor in order to find valid consideration.”
‘There may be a consideration without the accrual of any benefit at all to the promi-sor. If the promisee has suffered any detriment however slight, or though he has suffered no real detriment, if he has done what he was not otherwise bound to do, in return for the promise, he has given a consideration and the court will not ask whether the promisor was benefitted.’
Id.
at 805-06 (quoting
Hillcrest Foundation, Inc. v. McFeaters,
Here, whether Lift obtained valid security interests in Main’s assets depends not on whether Main received the benefit, directly or indirectly, of the Lift/Beratan loans, but on whether Lift “gave value,” or “suffered any detriment” in exchange for his security interests. Under
Adelvision
and the authorities cited above, by loaning money to corporate affiliates and predecessors of Main, Lift gave sufficient value to obtain a valid security interest in Main’s assets. If valid security agreements existed (possibly the financing statements themselves), and if Main had rights in the collateral hypothecated, Lift’s security interests were attached. Presumably, these attached security interests would have been perfected by his filing of U.C.C. financing statements.
15
The Bankruptcy Court focused only on whether Lift or the Beratans could prove that they made loans to Main, ignoring the greater question of whether Lift gave “value.” The issue was not whether Main
received
value, but rather
The Court does not now hold that Lift’s security interests in and judicial liens on Main’s assets are valid, which is an issue that must be left for the Bankruptcy Court to decide on remand. Lift’s security interests could be found invalid, for example, if they were based on wholly fictitious obligations. The Bankruptcy Court must also determine the extent to which Lift’s claims, if valid, have been reduced through repayment by Main and the other corporate entities.
See
The Bankruptcy Court should also consider on remand whether Lift’s security interests, if valid, extend to “future advances” within the scope of 13 Pa. Cons.Stat. § 9204(c).
See
13 Pa. Cons.Stat. § 9204(c) (“Obligations covered by a security agreement may include future advances or other value whether or npt the advances or value are given pursuant to commitment (section 9105(a)).”);
see also Kitmitto v. First Pa. Bank, N.A.,
In declaring Lift’s foreclosure upon and subsequent conveyance of Main’s assets to Columbusco fraudulent under UFTA, the Bankruptcy Court devoted much discussion to the eleven “badges of fraud” set forth in § 5104(b) of UFTA and their overlapping counterparts utilized to interpret § 548(a)(1) of the Bankruptcy Code. As the Bankruptcy Court properly recognized, UFTA’s eleven factors may be considered in evaluating whether a transfer was made with “actual intent to defraud” for the purpose of § 5104(a) of UFTA.
2) The Bankruptcy Court Erred In Holding That Lift’s Foreclosure Could Be Found Collusive Even If His Security Interests In Main’s Assets Were Valid.
The Bankruptcy Court appears to have rested its holding on an alternative ground. In setting aside the transfer of Main’s assets under § 5104, the Bankruptcy Court concluded that “Lift’s secured status,
even if legitimate,
does not insulate the Defendants from a claim of fraudulent conveyance if the foreclosure transaction is found to be collusive.”
Dealing with these issues, the United States Supreme Court held, in
BFP v. Resolution Trust Corp.,
The Bankruptcy Court cited
Voest-Alpine,
a Third Circuit decision in which a “sham foreclosure” was “set aside.”
Moreover, the VoesC-Alpine court held that unsecured creditors of the debtor corporation were prejudiced by a foreclosure sale of inventory and equipment at which less than fair market value was obtained:
The third requirement for finding a fraudulent conveyance is that creditors have been prejudiced by the transaction in question. It seems clear to us that the depletion of Paige’s assets obviously hurt all of Paige’s unsecured creditors, and VATCO was the largest among them, holding about 55% of Paige’s unsecured debt. VATCO here makes a persuasive case that, if Vantage had paid fair consideration to Paige, there would have been up to $400,000 left over for the unsecured creditors of Paige.
In proceeding with its analysis under UFTA, the Bankruptcy Court referred repeatedly to the fact that “Lift only paid $1.00 for Main’s assets, which were worth [at least] $35,000, even according to Lift and the other Defendants,” and which generated over $3 million annually in revenue.
The evidence upon which the Bankruptcy Court rested its determination that Lift’s foreclosure was collusive appears largely circumstantial. The Court questions whether Lift’s prior reluctance to foreclose on Main’s assets should serve as evidence of fraudulent intent. The law should not penalize creditors who, while having a legal right to foreclose, refrain from doing so to permit a debtor to attempt to resolve his financial difficulties and keep his business operating. In declaring Lift’s foreclosure sale collusive, the Bankruptcy Court also emphasized the timing of Lift’s confessed judgments against Main, and in particular, the fact that Lift’s November 12, 1992 confessed judgment was entered on the same day that Arch entered its confessed judgment against Archco and Blatstein. This timing was viewed by the Bankruptcy Court as proof that Blatstein and Lift were collaborating to enter a “defensive” confessed judgment intended to thwart Arch’s collection efforts. Although Lift testified that he “did not find out about Arch’s claims until Main’s bank accounts were garnished in February 1996,” the Bankruptcy Court rejected that testimony:
We find that Lift’s claims of innocence are not credible. We do not think it is a mere coincidence that Lift filed his UCC financing statement and obtained a confession of judgment against Main on the same day that Arch obtained its confessed judgment. This is yet additional proof of the collusive and sham nature of Lift’s actions as they relate to the debts he was allegedly owed by Main.
The Bankruptcy Court thus not only found Lift’s testimony incredible, but used its opinion that a coincidence did not exist as evidence of collusion. The Court disagrees with the Bankruptcy Court’s logic, particularly because it carries the implication of fraud and perjury. The Court notes that on November 12, 1992, Main had no relationship with Archco. Thus, a defensive filing by Lift against Main would not serve any logical purpose. The Bankruptcy Court also failed to note that Lift obtained confessions of judgment and filed U.C.C. financing statements in May, 1992, several months prior to the November “coincidence.” Moreover, if Blatstein were truly concerned about Main’s potential liability on a judgment that Arch confessed against Archco and himself, it appears highly unlikely that he would have permitted Main to ignore Arch’s interrogatories in aid of execution and then fail to appear at the assessment of damages hearing, thus triggering the $2.7 million default judgment against Main. In conclusion, the Court holds that the circumstantial evidence relied upon by the Bankruptcy Court fails to support its finding of a collusive foreclosure, and this finding constituted clear error.
3) The Bankruptcy Court Erred In Utilizing 11 U.S.C. § 510(c) To Subordinate Lift’s Security Interests.
The Bankruptcy Court concluded that even if “Lift was entitled to any claim, we would nevertheless be inclined to subordinate any such claim to those of not only Arch, but all other ‘innocent’ creditors of Main.”
Under § 510(c)(1) of the Bankruptcy Code, existing priorities among creditors may be reordered “under principles of equitable subordination.” 11 U.S.C. § 510(c)(1) (1993);
Burden v. United States,
Nonetheless, “the relief of subordination ‘should be applied only in limited circumstances.’ ”
In re Big Wheel Holding Co.,
The Bankruptcy Court held that Lift’s security interests in Main’s assets should be subordinated to the claims of all other creditors because he
was an active participant in the fraudulent conveyance of all or most of Main’s assets to, ultimately, Columbusco. This conduct is clearly inequitable conduct which greatly unfairly disadvantaged Main’s creditors. The ends of the Code, specifically the policy expressed in 11 U.S.C. § 548(a)(1), are served by subordinating the claims of a party engaging in such activity.
But if Lift’s claims were valid — as the Bankruptcy Court
presumes
for the purpose of its analysis under § 510(c),
4) On Remand, The Bankruptcy Court Should Address The Superior Court’s Possible Limitation On The Right Of
There remains another issue to be considered on remand. The Court of Common Pleas denied Main’s petition to open Arch’s-default judgment. On appeal, the Superior Court affirmed, but with the caveat that “the right of [Arch] ... to execute against assets in the hand of Main, Inc. is limited to those assets owed to, owned, or controlled by Eric J. Blatstein.”
718 Arch Street Assocs.,
No. 1849, slip op. at 5-6,
After careful review of the District Court’s opinion and the opinions issued by the Bankruptcy Court in these proceedings, the Court has not found any analysis of the impact of the Superior Court’s apparent limitation on Arch’s claim against Main. The Superior Court appears to suggest that Main’s liability to Arch is simply that of a garnishee, i.e. it is liable only to the extent that funds in its possession are owed to or controlled by Blat-stein individually. Again, it appears that Main owes nothing to Blatstein and does not possess funds under individual control by Blatstein. On remand, the Bankruptcy Court should consider the impact of the Superior Court’s decision on the extent of Arch’s claim against Main.
A. On Remand The Bankruptcy Court Must Reconsider The Denial Of Blatstein’s Bankruptcy Discharge.
The Bankruptcy Code’s discharge provision (11 U.S.C. § 727) is at “the heart of the fresh start provisions of the bankruptcy law,” H.R.Rep. No. 595, 95th Cong., 1st Sess.
384
(1977), and must be construed liberally in the debtor’s favor.
See, e.g., In re Burgess,
The Bankruptcy Court concluded that “Blatstein’s bankruptcy discharge must be denied pursuant to 11 U.S.C. §§ 727(a)(2)(A), (a)(7) on account of his orchestration of the actual fraudulent transfer of debtor Main’s assets within one year of the bankruptcy filings.”
B. The Court Agrees That Arch Has Failed To Meet Its Burden Of Proving That The Non-Debtor Corporate Defendants Are Alter-Egos Of Blat-stein And Main.
A corporation is a legal entity separate and distinct from its shareholders; thus only the corporation, not its owners, are liable for the corporation’s debts.
See United States v. Sain,
The legal status of a corporation may be disregarded only where “ ‘the corporation was an artifice and sham to execute illegitimate purposes and [an] abuse of the corporate fiction and immunity that it carries.’ ”
Kaplan v. First Options of Chicago, Inc.,
In determining whether to pierce the corporate veil, a court should consider the following factors: whether the corporation is grossly undercapitalized for its intended purpose; whether corporate formalities were followed; whether dividends were paid; whether the corporation is insolvent; whether the dominant shareholder has siphoned funds; whether there exist other officers; and whether the corporation is merely a facade for the operations of the dominant stockholder.
See Solomon v. Klein,
Arch premises its alter-ego theory on evidence that the corporate defendants frequently assumed each other’s loan obligations, loaned money to each other without interest, and paid Blatstein’s personal expenses. Arch’s own expert conceded, however, that the corporate loans to Blatstein were declared on his personal income tax return, and that the corporations treated these loans as income to Blatstein. Arch’s expert also acknowledged that banks frequently require that related corporations guarantee loans and other financial transactions, and that here, Jefferson Bank in fact required the corporate defendants to cover each other’s overdrafts.
The Bankruptcy Court found that the corporate defendants maintained separate books and bank accounts and filed separate tax returns. Moreover, Defendants’ expert testified that while the corporate defendants recorded combined gross revenues in 1996 of $31,000,000, inter-company transactions totaled $1,216,000, or only 3.89% of combined corporate revenues. In fact, rather than using the corporate entities to shelter funds otherwise available to his creditors, Blatstein was a net debtor to his corporations, owing Main in excess of $400,000.
The Bankruptcy Court also noted that it is neither illegal nor improper for closely-held corporations to grant non-interest bearing loans to their officers, or to pay personal expenses, provided that such transactions are properly documented. In light of the evidence of record, the Bankruptcy Court properly refused to declare the non-debtor corporate defendants alter-egos of Blatstein and Main.
C. The Court Agrees That Arch Has Failed To Meet Its Burden Of Proving That Blatstein Fraudulently Transferred Assets And Income To His Wife.
Pennsylvania subscribes to the majority view that property held as tenants by the entireties is unavailable to satisfy claims of the creditor of only one of the tenants.
See Sterrett v. Sterrett,
Arch alleged that the Blatsteins’ ownership of the stock of the corporate defendants as tenants by the entireties constituted a fraudulent conveyance. As the Bankruptcy Court pointed out, however, the corporate defendants’ articles of incorporation, as well as the stock certificates, establish that corporate ownership had been by the entireties since the formation of each of the corporate defendants. The Bankruptcy Court found no evidence that the ownership of any of the
Arch further contended that Blat-stein’s transfer of income and other money into accounts maintained in his wife’s name alone should be set aside under 12 Pa. Cons. Stat. § 5104. At trial, Lori Blatstein confirmed that their brokerage and bank accounts were held in her name alone. Ms. Blatstein explained, however, that this practice was not intended to defraud creditors, but arose from the fact that, as a result of numerous overdrafts, banks refused to permit Blatstein to open accounts. The practice also arose from Blatstein’s tax hens. Ms. Blatstein testified that her accounts were used to pay them mortgage, pay bills and tax liabilities of the corporate defendants, and to set money aside for their childrens’ college educations. In light of this evidence, the Bankruptcy Court properly found “insufficient proof that this was done to keep creditors such as Arch from attaching the accounts.”
Moreover, the Bankruptcy Court concluded, it was “impossible, on th[e] record, to find that ‘reasonably equivalent value’ was not given to Blatstein and the corporations in exchange for their deposits into these accounts,” pointing out that “Lori is and was at all pertinent times the rightful half-owner of all of the corporations in which Blatstein had an interest.” The Bankruptcy Court explained:
The funds that Blatstein was paid from the corporations as salaries were not the same as paychecks from a third-party employer. Rather, these payments could be viewed as distributions of dividends or equity from the corporations owned by both him and Lori to them both as the sole owners of the corporations.
In light of the foregoing evidence of record, the Court affirms the Bankruptcy Court’s refusal to set aside Blatstein’s deposit of income and other funds in the accounts maintained in his wife’s name.
D. The Bankruptcy Court Properly Utilized June 1, 1993 As The Date Of Repossession Or Surrender For The Purpose Of Calculating The Cap On Arch’s Future Rent Claim.
Under § 502(b)(6) of the Bankruptcy Code, a lessor’s claim for “damages resulting from the termination of a lease of real property” must be disallowed to the extent that such claim exceeds:
(A) the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease, following the earlier of—
(i) the date of the filing of the petition; and
(ii) the date on which such lessor repossessed, or the lessee surrendered, the leased property; plus
(B) any unpaid rent due under such lease, without acceleration, on the earlier of such dates.
11 U.S.C. § 502(b)(6).
In its April 23, 1997 decision, the Bankruptcy Court utilized § 502(b)(6) to reduce Arch’s claim from in excess of $3 million to $269,159. In performing the § 502(b)(6) calculation, the Bankruptcy Court assumed without discussion that April 6, 1992 — the date on which Blatstein was prevented from emptying the contents of the nightclub and Arch padlocked the premises — should be deemed the date of repossession or surrender.
On appeal, the District Court concluded that although the § 502(b)(6) cap was applicable, April 6, 1992 could not be the correct date because: (1) the concepts of repossession and surrender as utilized in § 502(b)(6) must be construed in accordance with state law; (2) under Pennsylvania law, liability for future (or reserved) rent is terminated by the lessor’s repossession of the property; and (3) in refusing to open Arch’s confessed judgment against Blatstein, the Superior Court affirmed Blatstein’s liability through the end of the lease term. Accordingly, the District Court concluded, the Superior Court
must
have concluded that the premises were not surrendered on April 6, 1992. That decision
The District Court remanded the issue to the Bankruptcy Court to determine the date of repossession or surrender of the premises in accordance with state law, and to recalculate the § 502(b)(6) reduction of Arch’s claim utilizing the correct date. In its October 7, 1997 opinion, the Bankruptcy Court concluded that repossession or surrender should be measured from June 1, 1993 — -the date on which Arch leased the property to a new tenant.
Under Pennsylvania law, a lessor “can eject the tenant and at the same time enter judgment for the rent accrued when the tenant was evicted; but he cannot recover both the possession and the rent for the balance of the term.”
Homart Dev. Corp. v. Sgrenci,
By leasing the premises to Illusions, Arch took action “adverse to any redemption of occupation” by Blatstein. Accordingly, the Court affirms the Bankruptcy Court’s utilization of June 1, 1993 as the date of repossession or surrender for the purpose of applying the § 502(b)(6) cap on Arch’s claim for future rent.
Y. CONCLUSION
For the foregoing reasons, the September 8,1997 Opinion and Order of the Bankruptcy Court, holding that the assets of Main, Inc. were conveyed to Columbusco, Inc. in violation of Pennsylvania’s Uniform Fraudulent Transfer Act, 12 Pa. Cons.Stat. § 5104, is REVERSED and remanded for further proceedings consistent with this Opinion. The Bankruptcy Court’s denial of a bankruptcy discharge to Eric J. Blatstein pursuant to 11 U.S.C. § 727(a)(2)(A) is REVERSED and remanded for further consideration consistent with this Opinion. All other aspects of the Bankruptcy Court’s September 8, 1997 and October 7,1997 Opinions and Orders are AFFIRMED. An appropriate Order follows.
ORDER
AND NOW, this 23rd day of September, 1998, upon consideration of the briefs filed in support of cross-appeals in this matter, and having heard oral argument, it is ORDERED that:
1. The Bankruptcy Court’s decision is AFFIRMED in part and REVERSED in part.
2. The case is REMANDED to the Bankruptcy Court for further proceedings consistent with the Court’s Opinion of this date.
It is further ORDERED that Plaintiff Miller’s Motions to Amend Stay Order Pending Appeal (97-CV-7064 & 97-CV-7069) and Debtor Main’s Motion to Amend Stay Order Pending Appeal (97-CV-7066) are DISMISSED as moot.
Notes
. The Court will refer to Blatstein, Main, and Lift collectively as "Defendants.”
. The Bankruptcy Court found that funds were kept in Ms. Blatstein’s name because of Blat-stein’s tax liens and credit problems, not to prevent Arch from collecting its judgment.
. The Bankruptcy Court found that all of the corporations maintained separate books, records, and bank accounts, and that inter-corporate transfers amounted to less than 4% of combined revenues.
. The issues on appeal before this Court are described in detail infra pp. 147-48.
. Blatstein and his wife Lori are the sole shareholders of Main and the non-debtor defendants (as tenants by the entireties).
. The Beratans are not parties to these proceedings.
. On June 1, 1993, Arch re-leased part of the premises to Illusions, Inc., which was also a nightclub operator. Illusions provided Arch with a security deposit of $11,000 and monthly rent of $5,500. In October, 1994, Arch's mortgagee foreclosed on the property, terminating Illusion's lease.
. In addition to Archco, these entities included Walnut Federal, Inc., which operated a restaurant and nightclub, and Boulevardco, Inc., which operated a sports bar.
. The Bankruptcy Court also found that effective July 1, 1996, weeks prior to the foreclosure, Blatstein had transferred all of Main’s assets and employees to Columbusco. The Bankruptcy Court explained that following the July 1, 1996 transfer:
Columbusco owned and operated Philly Rock and received all of the proceeds from its operation. All of Main’s assets and employees were
213 B.R. at 83 . According to the Bankruptcy Court's determination, on July 25, 1996, Lift foreclosed on the assets of a corporation that no longer possessed any assets. The Bankruptcy Court fails to explain how Lift was able to foreclose on Main’s assets and transfer those assets to Columbuseo, weeks after Blatstein had already caused those very same assets to be transferred from Main to Columbuseo.
. Under 11 U.S.C. § 548(a)(2)(A) "The trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily ... received less than a reasonably equivalent value in exchange for such transfer or obligation...." 11 U.S.C. § 548(a)(2)(A) (1993) (emphasis added).
. A “collusive” transaction is defined generally as one involving "secret cooperation for a fraudulent or deceitful purpose.”
In re New York Trap Rock Corp.,
. Security interests in money or instruments must be perfected through possession. See 13 Pa. Cons.Stat. § 9304(a).
. In addressing Arch's alter-ego claim, the Bankruptcy Court found that loans made by Lift for the benefit of Blatstein and the defendant corporations, as "evidenced by check,” totaled $530,758.86, and that the Beratans’ loans evidenced by check totaled $790,200.
. The IRS also contended that because Cook was going to make a substantial profit on his purchase of the Hamilton loan, he suffered no detriment sufficient to support consideration. Quoting Professor Williston, the district court rejected this argument: "It is an 'elementary principle that the law will not enter into an inquiry as to the adequacy of consideration.’ The rule is almost as old as the law of consideration itself.”
. The granting of a security interest itself in the assets of the debtor is a transfer subject to avoidance under the Bankruptcy Code. It appears, and must be assured on remand, that Lift had solidified his secured interests in Main by November, 1992 at the latest. This date being just less than four years prior to the filing of Main’s bankruptcy petition, Main’s transfer of a security interest to Lift would not be subject to the avoidance provisions of either § 547 or § 548 of the Bankruptcy Code.
. In holding that the amount received at a "regularly conducted” and "noncollusive” foreclosure sale should be deemed to be reasonably equivalent value as a matter of law, the
In re Bennett
court applied the test stated in
In re Madrid,
. The Court does not consider Main's $3 million annual sales figure, standing alone, to be disposi-
. The Third Circuit has suggested that inequitable conduct is not a prerequisite to equitable subordination. See
Burden v. United States,